WASHINGTON — Sen. Ron Johnson (R-Wis.), chairman of the Senate Homeland Security and Governmental Affairs Committee, released a report Wednesday, “The Labor Department’s Fiduciary Rule: How a Flawed Process Could Hurt Retirement Savers,” detailing the Labor Department’s flawed process in handing down its fiduciary rule.
“The Labor Department’s rule threatens to harm low- and middle-income Americans by increasing the cost of investment advice,” said Johnson. “Saving for retirement is important, and investing can be a complex process. Ensuring Americans’ access to investment advice will help them plan for retirement. Americans saving their hard-earned money shouldn’t face additional hurdles imposed by Washington.”
Johnson’s inquiry revealed that the Labor Department disregarded concerns and recommendations from career, nonpartisan, professional staff at the Securities and Exchange Commission (SEC), regulatory experts at the Office of Information and Regulatory Affairs (OIRA) within the Office of Management and Budget (OMB), and Treasury Department officials. The report shows how the Labor Department pushed to issue the regulation at the expense of thoughtful deliberation. The report presents signs that political appointees at the White House played a key role in driving the rulemaking process.
Details of the report:
- Despite public assurances that the Labor Department had collaborated with the SEC, emails reveal discord between the agencies about the rulemaking. A Labor Department employee wrote to his SEC counterpart: “We have now gone far beyond the point where your input was helpful to me. . . . If you have nothing new to bring up, please stop emailing me.” The SEC staffer responded: “I am now also utterly confused as to what the purpose of the proposed DOL rule is.”
- Career, nonpartisan SEC staff identified at least 26 items of concern related to the substantive content of the proposed rule, and the Labor Department declined to fully resolve all of the concerns.
- After the Labor Department sought to address the SEC’s stated items of concern, a senior SEC official emphasized to the Labor Department that concerns remained:
[W]e continue to believe that commentators are likely to raise concerns that the proposal may result in reduced pricing options, rising costs and limited access to retirement advice, particularly for retail investors. Commentators also may express concerns that broker-dealers, as a practical matter, may be unlikely to use the exemptions provided and may stop providing services because of the number of conditions imposed, likely compliance costs, and lack of clarity around several provisions.
- The Labor Department rejected the SEC’s recommendation and ignored requirements set in executive orders to quantify the costs and benefits of alternative approaches. As a Labor Department employee explained, “We think this would be extraordinarily difficult and would appreciably delay the project for very little return.”
- Treasury officials voiced concerns that the Labor Department’s proposal, by attempting to regulate IRAs, “fl[ies] in the face of logic” and was contrary to congressional intent. The Labor Department promulgated the proposed rule less than two weeks after circulating this draft, undoubtedly limiting the extent to which the department considered the comments it received from the Treasury Department
- The administration was predetermined to regulate the industry and sought evidence to justify its action. In emails to senior White House advisors, a Labor Department official wrote of the need to find literature and data that “can be woven together to demonstrate that there is a market failure and to monetize the potential benefits of fixing it.” In another email, a Labor Department official discussed “building the case for why the rule is necessary.”
The report can be found here. Appendices can be found here: Appendix A, Appendix B, Appendix C.
Background:
In April 2015, the Labor Department issued the proposed rule, which would expand the definition of a fiduciary under the Employee Retirement Income Security Act of 1974 (ERISA). Experts contend that the rule would have unintended consequences of harming low- and middle-income retirement savers.
Investment advisors generally do not dispute the importance of acting in the best interest of their clients, and many advisors already abide by a best interest standard. However, experts warn that the rule would drive up the price of investment advice and would ultimately decrease the availability of advice for low- and middle-income investors. Experts anticipate that the rule would cause a loss of retirement savings of $68–80 billion per year, and would jeopardize retirement readiness for 11.9 million IRA and retirement participants.
Chairman Johnson pursued this oversight in the face of substantial opposition from the Labor Department. To date, the Labor Department remains nonresponsive to the chairman’s February 2015 requests for documents. The Labor Department has refused to produce any communications between the department and the White House, although Johnson later got hold of some of it through the SEC. The Labor Department has produced only a limited subset of self-selected communications between the department and the SEC and provided short staff briefings. Moreover, the Labor Department even urged the SEC to similarly hinder Johnson’s oversight work by asking the SEC to reject the chairman’s separate requests to the SEC for documents in the control and possession of the SEC. While the information available to the committee is limited due to the Labor Department’s obstruction, the report presents findings based on the material reviewed.
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